Goldmark: Keep promises; reform pensions

When you have a really thorny problem, time is of enormous value -- time to think the problem through, consider all points of view and, if painful measures are required, minimize the hurt by phasing them in carefully.

That is the situation with the great pension conundrum, which is a huge problem for Long Island, New York City, New York State, and state and local governments across the country.

The conundrum is how to pay for our vast collective "unfunded pension liability," the money we should be salting away to make good on the pensions we have promised to pay public workers later. On a national basis, this liability is huge, somewhere between $3 trillion and $4 trillion. We have time to figure out a solution -- if we have the wit and will to do so.

First, let's be precise as to what this obligation is: We have given those employed in state and local government the right to a pension calculated as a percentage of salary, sometimes with expensive variations such as extra credit for overtime. Every state and local government is supposed to pay a certain amount in advance of each worker's retirement into a pool of money set aside and invested against the day when that worker retires. Of course there are many workers, and so there's a lot of estimating: about how many will retire when and at what salaries, and even fuzzier guessing at how much the invested funds will grow by the time they're drawn down in retirement pay. Any projected shortfall in what will be needed to pay retirees is the "unfunded liability." This is unlike Social Security, an unfunded system in which today's retirees are paid from the contributions of today's workers.

Because of the recession and budget squeeze, many states have not been paying into their funds or, worse yet, have been borrowing to pay their obligations, which makes the hole bigger later on.

In most states public sector workers have a contractual right to that pension. How basic and how absolute is that right? That will be tested in the courts in the years ahead.

What to do in the face of this huge and growing unfunded liability?

To reach an answer we need a constructive dialogue among all the parties: the workers and their unions; the state and local governments who owe the money; and the taxpayers, through elected representatives and citizen groups.

In New York we have a strong governor and a relatively healthy pension system compared to other states. So New York can lead in addressing this problem. Step one is for the governor to appoint a respected independent commission to lead the dialogue and then frame options for Albany to consider. None of these options will be pretty, and none of the final choices easy.

Here are some early thoughts.

As a first principle, I believe we ought to keep the promises we've made. People accepted employment and planned their lives based on those promises.

Besides, there are good alternatives to reneging. In New York and other states where public pensions are exempt from local taxes, we must consider taxing them. All of us will have to pay more to keep society's promises. Individuals on the receiving end of those promises should pay more too.

New workers joining the public sector should receive far less generous pensions. One possibility is to cap them at the state's median income, thereby eliminating some of the wildly excessive pension payouts we see today.

In addition, we can save on other post-retirement benefits. These benefits, mostly in the health area, are not protected by contractual right. We will need to scale them back.

Let's use the asset of time wisely, and not blithely fritter it away while the financial holes grow deeper.

Peter Goldmark, a former budget director of New York State, is a member of the State Budget Crisis Task Force, co-chaired by Paul Volcker and Richard Ravitch.